Fed highlights global risks as it holds rates

Fed highlights global risks as it holds rates

The US Federal Reserve has voted to maintain the federal funds rate at 0.25 to 0.5 per cent as it warned “global economic and financial developments continue to pose risks”.

It stated that while US economic activity has been expanding at a “moderate” pace, global developments pose risks and the decline in energy prices is expected to keep inflation below the 2 per cent target in the near term.

The latest economic projections from the Federal Reserve showed the median projection for real GDP growth has been revised downwards for 2016 from 2.4 per cent to 2.2 per cent.

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Janet Yellen, chairman of the Federal Reserve, commented: “Since the turn of the year, concerns about global economic prospects have led to increased financial market volatility and somewhat tighter financial conditions in the US, although financial conditions have improved notably more recently. In addition, economic growth abroad appears to be running at a somewhat softer pace than previously expected. These unanticipated developments, however, have not resulted in material changes to the committee’s baseline outlook.”

However, the statement from the Federal Open Market Committee continued to emphasise the need for “only gradual increases in the federal funds rate”.

This was supported by the latest data, which showed the median projection for the federal funds rate by the end of 2016 stands at 0.9 per cent down from the 1.4 per cent estimated at December’s meeting.

Ms Yellen explained: “Compared with the projections made in December, the median path is about half a percentage point lower this year and next; the median longer-run normal federal funds rate has been revised down as well. In other words, most committee participants now expect that achieving economic outcomes similar to those anticipated in December will likely require a somewhat lower path for policy interest rates than foreseen at that time.

“I would like to underscore, however, that the participants’ projections for the federal funds rate, including the median path, are not a ‘plan’ for future policy. Policy is not on a preset course. The future path of policy is necessarily uncertain because the economy will surely evolve in unexpected ways. The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”